Stingy megabanks swimming in cash

If the megabanks are so big on lending, why do their loan books keep shrinking?

The biggest U.S. banks tell us they have spent the past quarter writing loans, renewing credit lines and generally being upstanding economic citizens. Bank of America (bac) says it provided consumers and businesses with $144 billion in credit in the first quarter, Wells Fargo (wfc) ponied up $151 billion and JPMorgan Chase (jpm), swinging for the PR fences, claims to have lent out an improbable-looking $450 billion.

Yet loan balances actually shrank from a year ago at all three banks in the first quarter, just as they did at their old pal Citi (c). This at a time when the too-big-to-fail four are being drenched with new deposits (see chart, right).

All told, average loans outstanding at the fearsome four dropped 7% from a year earlier – a decline of $210 billion — even as deposits rose 5%.

If this is what the bailed-out captains of the financial sector call supporting the recovery, no wonder the economy is going nowhere fast.

The banks, of course, protest that there are good reasons that their loan balances are dropping even as they wrap themselves in the flag of credit extension.

Good customers aren’t exactly banging down the door demanding loans, they say, and won’t till the recovery really gets rolling. And making loans for the sake of it doesn’t pay off, as we may have learned during the financial meltdown.

“We got to where we are today by making good loans and making sound credit decisions,” Wells Fargo’s chief financial officer, Tim Sloan, said in an interview Wednesday.

And yes, even with all that shrinkage there are pockets of loan growth at the banks. JPMorgan Chase says loans to midsize companies rose every month last year, and Wells points to strength in auto dealer and commercial lending, along with the oft-questioned commercial real estate sector. “We love that business,” says Sloan.

But mostly, loans are shrinking. That’s partly because banks must put the worst mistakes of the bubble era in the rearview mirror, by taking losses on bad loans and letting other low-quality portfolios run off. Both those moves lead to lower loans outstanding.

All four banks are taking their lumps on that front. BofA is running off loans from the beyond-lax Angelo Mozilo era at Countrywide, JPMorgan is dealing with the sales-at-any-cost (see a shining example, below right) mindset of Kerry Killinger & Co. at Washington Mutual, and Wells Fargo is trying to rid itself of the worst Pick-a-Pay dross it picked up in its acquisition of Wachovia. Citi, of course, has its own issues.

Still, it’s clear the banks are not lending quite as freely as their press release claims would have you believe. And the declines are all the more striking because they come when the banks, like their perk-addicted CEOs, are swimming in cash.

Average deposits at the four biggest banks rose by $154 billion over the past year, with Bank of America breaking $1 trillion in deposits for the first time and JPMorgan falling just $4 billion short of that mark.

As a result, all the big banks now have at least $1.06 in deposits for every dollar in loans outstanding. At this time a year ago, only JPMorgan was above $1 in deposits for each dollar in loans.

There is something to be said for banks having a lot of cash on hand, of course. As everyone but Dick Fuld learned from the crisis, running out of money makes it hard to persuade others of your firm’s franchise value. And of course it is hard to grow a business without reaching out to new users.

“We are glad to have a highly liquid balance sheet,” says Sloan. “Deposit growth gives us a chance to bring in new customers and cross-sell our products.”

Given the banks’ penchant for cooking up rosy-looking credit creation numbers at a time when their loan books are actually shrinking, maybe those products should come with a grain of salt.